Building a Passive Income Stream: 3 Top Dividend ETFs for Long-Term Returns

There are dozens of excellent low-cost index funds that pay dividends and could be great choices for long-term investors. However, a few stand out as particularly good combinations of income, long-term total return potential, and truly passive set-it-and-forget-it qualities.

Most of my favorite income ETFs are Vanguard products, and it's easy to see why. Vanguard ETFs have some of the lowest expenses in the industry, and there are dozens of excellent index funds to choose from, in both mutual fund and ETF forms.

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With that in mind, here are three Vanguard ETFs that could help you create a passive income stream for decades to come in your portfolio.

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Not the highest-paying ETF, but...

At first glance, the Vanguard Dividend Appreciation ETF (NYSEMKT:VIG), with a 1.8% yield, might not sound like a great choice. But there are a few things to keep in mind.

First, this is an index fund that focuses on stocks that are most likely to grow their dividends over time. So, if you want to create a passive income stream but are still a decade or more from retirement, this ETF is likely to produce a significantly higher amount of income in the future.

Second, because it isn't too focused on the highest-yielding stocks, the portfolio of the Vanguard Dividend Appreciation ETF is a bit more growth-oriented than your traditional income ETF. In fact, the technology sector is its highest concentration, with top holdings that include Broadcom (NASDAQ:AVGO), Microsoft (NASDAQ:MSFT), and Apple (NASDAQ:AAPL).

The proof is in the performance. Over the past decade, this ETF has generated 11.2% annualized total returns, and with a rock-bottom 0.05% expense ratio, you'll get to keep most of the fund's gains.

International exposure at a discount

One of the ETFs I've been buying rather aggressively in my own portfolio is the Vanguard International High Dividend Yield ETF (NASDAQ:VYMI).

As the name suggests, this tracks an index of non-U.S. companies that pay above average dividend yields. As of the latest information, the fund owns 1,560 different stocks and has a 4.2% dividend yield.

Not only can international stock exposure help diversify your portfolio and help offset U.S.-specific risk factors (like the trade tensions), but international stocks in general look cheap right now. For example, the average stock in the Vanguard International High Dividend Yield ETF trades for just 11.6 times earnings, compared with a P/E of 18.2 for stocks in the U.S. focused counterpart ETF, the Vanguard High Dividend Yield ETF (NYSEMKT:VYM).

It's also worth noting that although these are international stocks, that doesn't mean its full of companies you've never heard of. In fact, top holdings include household names such as Toyota (NYSE:TM), Shell (NYSE:SHEL), and Unilever (NYSE:UL).

A great ETF for a falling-rate environment

Although there are questions surrounding how soon and how aggressively the Federal Reserve will lower interest rates, the overwhelming consensus is that the direction of interest rates over the next couple of years is going to be downward.

Real estate is perhaps the most rate-sensitive part of the stock market. When rates are lower, real estate investment trusts can borrow money in a more cost-effective way, and commercial property values tend to rise, as yield plays a major role in their valuation.

The Vanguard Real Estate ETF (NYSEMKT:VNQ) has underperformed the market for several years, but this is mainly due to the interest rate environment and not because there is anything fundamentally wrong with the stocks it owns. While there's still tremendous uncertainty about where interest rates are heading in the short term, it could be a smart time for long-term investors to take a closer look at this ETF.

A great combination of income, return potential, and peace of mind

These certainly aren't the only three income ETFs I'm a fan of. There are some that take more active investment approaches on my radar, such as the options-focused JPMorgan Nasdaq Equity Premium Income ETF (NASDAQ:JEPQ). However, as far as creating a truly passive income stream that you can simply set-and-forget goes, these three Vanguard Income ETFs could be excellent additions to your portfolio.

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Matt Frankel has positions in Vanguard International High Dividend Yield ETF and Vanguard Real Estate ETF. The Motley Fool has positions in and recommends Apple, Microsoft, Vanguard Dividend Appreciation ETF, Vanguard Real Estate ETF, and Vanguard Whitehall Funds-Vanguard High Dividend Yield ETF. The Motley Fool recommends Broadcom and Unilever and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.